> On 2/7/2011 11:31 AM, Doug Henwood wrote:
>
>>> It was the hysterical forecast of price appreciation, not the "hiding" of risk
>> Not exactly. Goldman and the rest packaged dud securities and sold them to clients at the same time they were shorting the crap. They even shorted Bear Stearns' stock after Bear bought one of those turkeys. Also, in a bubble, people often can't see what should be obvious - that the forecasts were insane. Something like a negative amortization loan with low introductory teaser rates - in which the first few years of payments don't even cover the interest bill, much less reduce premium, only to be followed by a sharp rise in the interest rate - is clearly lunatic, but supposedly sophisticated people shoveled cash into them anyway. There are none so blind...
>
> It sounds like Goldman was making a contrarian bet on the correct house-price forecast, and taking advantage of Bear's non-contrarian (crazy) house-price forecast.
No. They'd sold Bear a bag of shit and realized that Bear was run by fools who didn't recognize they'd bought a bag of shit.
> This Brookings paper by Fed economists examines the data systematically:
>
> http://www.brookings.edu/economics/bpea/~/media/files/programs/es/bpea/2008_fall_bpea_papers/2008_fall_bpea_gerardi_sherlund_lehnert_willen.pdf
>
>> In this paper, we explore why market participants did not anticipate the
>> major increase in foreclosures. We first argue that the loans themselves were
>> not ex ante unreasonable. Loans made in 2005–2006 were not that different
>> from loans made earlier, which, in turn had performed well, despite carrying a
>> variety of serious risk factors....
>>
Except: "All that said, our models don’t perfectly predict the defaults that occurred and do often underestimate the number of defaults. One possible explanation is that there was an unobservable deterioration of underwriting standards in 2005 and 2006." Indeed.
Have you read any accounts of what went on at Countrywide and the rest? The forged documents and lied and made loans to people they knew were lying. That's not easy to capture in a regression, but that's what journalists are for. And the rating agencies enabled the fraud. You remember that wonderful comment by one of the rating guys? "We'd rate a security put together by cows."
> And you're right that the bubble could never have happened without credit availability. But I still see that as institutional, and I'm suspicious of the "weight of money" story.
Why? Institutional investors have more money than they know what to do with. Their bankers see this, and help them out. Smarter bankers see that their clients are credulous and then pump out all the garbage they can devise.
Doug